Illinois Democrats scoff at rival states' tax claims

Saturday

Jan 22, 2011 at 12:01 AMJan 22, 2011 at 9:03 PM

SPRINGFIELD -- Illinois Democrats are fighting back against Indiana’s effort to lure companies by portraying the Hoosier state as a better place to do business. At the same time, Senate President John Cullerton, D-Chicago, acknowledges the legislature needs to do more to make Illinois more business-friendly.

CHRIS WETTERICH

SPRINGFIELD -- Illinois Democrats are fighting back against Indiana’s effort to lure companies by portraying the Hoosier state as a better place to do business.

At the same time, Senate President John Cullerton, D-Chicago, acknowledges the legislature needs to do more to make Illinois more business-friendly.

Indiana’s offensive reached fever pitch this past week with a full-page letter published in The State Journal-Register, the Chicago Tribune and The Peoria Journal-Star from Indianapolis Mayor Gregory Ballard, a Republican, noting the income tax increase passed by Illinois Democrats in the legislature and signed by Gov. Pat Quinn on Jan. 13.

In the letter, Ballard described his city and state as “much more stable, affordable and pro-growth.” He also cited Indiana’s “low tax structure” and called it “the best business tax climate among Great Lakes states.”

That’s nonsense, Cullerton said.

“I’m glad that they highlighted the fact that our taxes are still — after the increase — in the case of Indiana, comparable, and in the case of Wisconsin, lower. In the case of Missouri, they’re lower. In the case of Iowa, they’re lower,” Cullerton said in an interview.

“Just a comparison side-by-side of the two taxes and those rates shows that Illinois and Indiana are not terribly far apart,” said John Ketzenberger, president of the nonpartisan Indiana Fiscal Policy Institute. “To the extent it gives the Department of Economic Development over here an opportunity to try to take advantage of the news, then, you know, it creates some upheaval.

“I don’t think there are many businesses with long-term business plans that would just uproot their business to chase a marginal difference in taxes. There are a lot of other factors that play into this and you know they may make a decision and it may give them a reason to look at it, but on its face, that’s not it.”

Ballard spokesman Marc Lotter pointed to 2010 business-climate rankings by the nonpartisan, Washington, D.C.-based Tax Foundation, which were calculated before Illinois’ tax increase, showing Indiana ahead in many major categories.

Ketzenberger noted that there is a difference between tax rates and the overall business climate that goes into such rankings.

“You factor in a lot of other conditions like the Tax Foundation does and weigh these things, and that’s how they reach their rankings,” he said.

Quality of life

Cullerton agrees that Illinois has work to do to make it more attractive to businesses, particularly when it comes to workers’ compensation, in which Illinois has the third-highest premiums in the country.

“You know what? That’s workers’ comp,” Cullerton said when asked about the Tax Foundation rankings. “We’ve readily acknowledged that. Some aspects, the business community’s split. And the Republican Party is split on it because their doctor friends don’t want to make any changes.”

Cullerton urged people looking to compare to dig into the subtleties of each state’s tax code. He noted that Indiana taxes retirement income, while Illinois does not; Indiana has a sales tax that applies to most services, including dry cleaning, that aren’t taxed in Illinois; and Illinois has a greater personal exemption from the income tax than Indiana.

“And you have to live in Indiana,” Cullerton said. “The head of China is not flying into, you know, Indianapolis. He’s coming to Chicago. There’s some other factors in terms of quality of life we’d like to highlight in Illinois.”

The Senate Democratic staff, with the aid of Illinois’ Commission on Government Forecasting and Accountability, compiled a study that showed Illinois would have had an additional $5.6 billion in revenue — before Illinois’ income tax increase — if Illinois had the same tax structure as Indiana. The Illinois income tax increase is estimated to raise $7 billion annually.

Local income tax

Indiana is no stranger to tax increases or concerns about a bad business climate.

Indianapolis Mayor Ballard was elected in 2007 after the previous mayor and city-county council increased the local income tax from 1 percent to 1.65 percent.

“We are standing in front of a U-Haul truck. People are moving out of this county. They are angry that we have a 65 percent tax increase on top of the property taxes,” Ballard said during the mayoral race, according to an Internet account from WTHR-TV in Indianapolis.

Lotter said the income tax has been cut. However, according to the Indiana Department of Revenue, it stands at 1.62 percent today. Those who pay income taxes in Indianapolis will pay 5.02 percent compared with 5 percent in Springfield. The sales tax is 7 percent statewide in Indiana compared with 8 percent in the city of Springfield.

Indiana Gov. Mitch Daniels and the legislature raised Indiana’s sales tax from 6 percent to 7 percent in 2008 in the midst of the recession, Cullerton noted.

Ketzenberger said the sales tax increase was part of an effort by Daniels to cap property taxes. The state used the sales tax revenue and took over all school funding and certain welfare programs. Property taxes were then capped at 1 percent of the fair market value of homes, 2 percent of farm and rental property and 3 percent of business property.

But reviews have been mixed, Ketzenberger said.

“It depends on who you ask,” he said. “The state thinks it’s a great victory. But many local governments have lost a lot of their revenue for just general operation. I think it’s about a total of $600 million taken out of local governments across the state as a result of the caps. It just puts the pinch on their budgets.”

Service reductions

The tradeoff for Indiana taxpayers in some counties has been cuts in police, fire and other public services. Counties also can hold referendums to lift the property tax caps in order to raise money for operations or construction.

“Delaware County where Muncie is … they’ve lost about 24 percent of their revenue. That’s an older, urban area with a lot of empty AV (assessed valuation) because of factories and stuff. They’re having to make cuts in services,” Ketzenberger said.

Lotter said recent tax law changes make businesses feel safe in going to Indiana.

“Indiana has property tax caps. It does offer stability and predictability,” he said.

Ketzenberger said Indiana continues to have a structural budget deficit, which he pegs at $600 million, but a surplus allows the budget to be balanced.

“We’re still spending more than we’re taking in,” he said. “But there are no back bills.”

Daniels’ budget office projects elimination of the structural deficit by the end of the 2013 fiscal year “assuming the bottom doesn’t drop out again,” Ketzenberger said.

“I don’t have any reason to doubt those numbers,” he said.

Meanwhile, with its tax increase, Illinois is only just now starting to swim out of a river of red ink, pegged by budget experts at roughly $13 billion to $15 billion, including at least $6.5 billion in unpaid bills. Cullerton said the income tax increase will steady Illinois’ fiscal condition.

“We’ve got stability now. At least for four years. Beyond that, it’s up to future general assemblies,” Cullerton said.

Chris Wetterich can be reached at (217) 788-1523.

Cullerton willing to trade taxes

Senate President John Cullerton said he’s willing to slash Illinois’ new corporate tax rate if Republicans are willing to look at modernizing the state’s tax structure, including expanding the sales tax base to services.

Legislative Republicans have pilloried the Democrats for raising the corporate income tax from 4.8 percent to 7 percent. They note that when the personal property replacement tax, which is generally 2.5 percent, is included, the state’s corporate income tax is 9.5 percent, the fourth highest in the nation, according to the nonpartisan Tax Foundation.

But Cullerton rejects the notion that the personal property replacement tax should be counted as an income tax on corporations.

The revenue from that tax does not go to the state – it replaces a personal property tax that local governments could assess on businesses before 1979, according to the Illinois Department of Revenue. Other states, such as Indiana, allow local governments to tax equipment used by businesses to produce income or held as an investment.

“If you’re going to play that game of adding 2.5 percent to our corporate income tax because of the personal property replacement tax — first of all, the state doesn’t get that money,” Cullerton said. “No. 2, it’s a replacement tax. The other states have a personal property tax. We don’t. In 1979, we voted, with the businesses’ input, for a replacement tax.”

Cullerton noted that extending the sales tax to services was in a 2009 tax increase bill passed by the Senate, which died because of lack of action by the House.

“We broadened the sales tax, we increased the earned-income tax credit, we increased the personal exemption, we gave an education tax credit, and we increased the property tax credit,” he said.

Any modifications made to the income tax increase passed by the legislature earlier this month will have to be revenue-neutral, Cullerton added.

“We could start taxing retirement income over $100,000, for example,” he said. “So we’re open to all those things, but we need their support.”

Patty Schuh, a spokeswoman for Senate Minority Leader Christine Radogno, R-Lemont, threw cold water on the idea of starting tax-reform discussions by assuming the amount of revenue brought in by the income tax increase will remain the same.

“It’s almost comical,” Schuh said. “Why raise taxes in the first place? How about cutting the budget?”